The Following article was published in the Mississauga Board of Trade – June 2007   Magazine / Newsletter

Your Taxes & Finances:

Maximizing Your Personal Prosperity

Whether you operate a small business or an international conglomerate, you can maximize your personal prosperity by ensuring the money from your business works for you.  As personal tax time is rapidly approaching, and with business tax deadlines not far behind, how can this be accomplished?

Incorporating a Small Business or Not

Company structure plays a role.  Ideally, protecting your money should begin when you set up your company. Do you incorporate or not?  Typically, you incorporate a business for liability and tax reasons.  Incorporation in most cases protects the entrepreneur from personal liability and enables him/her to reduce taxes through various means of deferral and income splitting.

It is very common for a business to lose money in its first year of operation. Under this scenario you may be better served not incorporating and applying those losses against personal income. In most cases you can protect yourself from liabilities through various forms of business insurance. Once the business becomes profitable the business assets can be rolled into a new corporation with relative ease. 

Income Splitting

Consider the benefits of issuing shares to other family members. These shares can be non-voting and, if structured correctly, can over time allow the entrepreneur to distribute dividends to various members of his/her family. This offers many income tax benefits. For example, business owners have used this structure to help support their young adult children through post secondary education.

One should also keep in mind the $500,000 capital gains exemption afforded all Canadian taxpayers on the sale of qualified small businesses. The accumulation of this exemption among family members could reap a substantial tax savings.

Holding Companies Are Tax-Beneficial

Shareholders who own and control at of a Canadian Controlled Private Corporation (CCPC) should consider rolling their shares into an incorporated Holding Company. Dividends from the CCPC can pass through to the Holding Company free of tax, and until the money is required for personal use the pretax dollars can be used to finance the purchase of other selective investments.

Current Year Tax Planning

There are several common mistakes entrepreneurs make when filing business taxes.  Too many small business owners don’t have a workable system for organizing their invoices, receipts, etc. on an consistent basis.  Because of this, many also tend to leave filing to the last minute, which is not a good idea if you want the care and attention of an experienced accountant.  You should aim to send the company’s trial balance at least one month prior to both the calendar and fiscal year end. 

It is vital (and cost-effective) to go to a qualified business accountant.  Business tax returns should never be a do-it-yourself project.  Chartered accountants who specialize in small business know what the government is looking for when conducting audits, and know how to walk the line between maximizing revenue retention and raising red flags with the Revenue Canada.

Long Term Planning 

It is not always best to look at your tax planning in a one year cycle. Stand back and look at the 5-year picture.  Think about how you plan to leave the business.  Are you counting on the sale of the business to support your retirement? For example, with smaller businesses, it might be more prudent to consider the ease of selling a business which shows larger profits. This makes it more appealing to potential buyers and some of the management fees can be paid through dividends.

Legally speaking, “fixing” problems later can be costly. Working with an experienced corporate and tax lawyer can mitigate taxes and help you advance-plan for both personal and business needs.

Written by Miles Backhouse with Enable You Inc. Miles Backhouse is a Corporate Lawyer with over 25 years experience in business and tax law. To attend Mr. Backhouse’s Open House presentation on tax and financing for fellow MBOT members, or to book a Business Check-up consultation, contact his office at 905-502-0070